Mergers and acquisitions often involve consideration of employment law, given that such transactions may also result in restructuring of both the acquirer and the target. For example, the acquirer may not want all employees in the target to stay on after the acquisition. In Tinus Wilting v Itasa Asia Sdn Bhd (Award No. 1215 of 2021, 16 August 2021), the Industrial Court considered how a key employee’s employment status was affected by a sale of business.
Brief Facts
- The Claimant was employed by Akronn Industries Sdn Bhd (“Akronn”) as its Executive Director, for a fixed term of 5 years from 1 June 2014 until 31 May 2019.
- The Claimant was also a director of Akronn, and had a minority share in Akronn.
- In 2016, Itasa Servicios Generales SL (“Itasa Spain”) acquired Akronn.
- Akronn changed its name to Itasa Asia Sdn Bhd (“Itasa Asia”). For this article, we will refer to Itasa Asia (formerly known as Akronn) as “the Company”.
- As part of the acquisition, the Claimant relinquished his directorship.
- The Claimant left Malaysia in June 2016 due to the expiry of his work permit, and also because he had to assist the Company’s operations in Europe.
- In October 2016, the Company issued a notice of termination and informed the Claimant that his services were no longer needed.
- The Claimant filed a complaint of unfair dismissal.
- Briefly, the Company’s position is that the Claimant was not an employee of the Company:
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- The Company alleged that the sale of Akronn was not a sale of shares, but a complete sale of business (lock, stock and barrel). The Claimant’s employment was deemed terminated with the change in ownership of business, given that the Company did not offer to continue to employ him.
- The Company also alleged that if anything, the Claimant was just a director of Akronn, wherein he had tendered his resignation and therefore is not an employee.
Court’s Findings
The Court found that the acquisition was a share sale. The Company had just merely changed its name from Akronn to Itasa Asia but kept the same registration number, manpower, and business address. All existing employees (excluding the Claimant) continued working as usual with the same employee numbers and continued their employment based on the same employment contracts entered before the share sale.
In a share sale, even though the share capital of the Company was acquired by another firm, the Company still survived and carried on business as usual. Therefore, there is no “legal change” of business.
Simply put, a change in the shareholding of the Company does not affect the Claimant’s fixed term employment contract.
Given that the Company is still the same legal entity that employed the Claimant, the Company could not rely on the change of shareholding as a basis to dishonour the fixed term employment contract. The Company had therefore prematurely and unlawfully dismissed the Claimant in 2016 when the Claimant’s employment was supposed to have contractually ended in March 2019.
The Court held that the Company was therefore liable to pay the Claimant the balance of the contract period not served, but capped at 24 months’ of backwages. The Claimant was awarded RM775,000.00 consisting compensation in lieu of reinstatement (2 months) and backwages of 24 months.
Key Takeaways
There is a distinction between a share sale and an asset sale in an acquisition. The two different acquisition types have differing implications on the employees in the target company.
In a share sale, the acquirer (“Acquirer”) purchases the shares in the target company (“Target”). The ownership of shares in the Target changes, but the Target remains the same legal entity. The Acquirer takes on ownership of the Target including its assets and liabilities. A share sale does not affect the employment of the Target’s employees, since the legal entity that employs them remains the same.
In an asset sale, the Acquirer purchases the Target’s assets which can include things like real estate, machinery, contracts, and employees. The Acquirer can therefore choose which assets to purchase and which assets to be carved out from the acquisition. Regarding employees, an Acquirer can choose not to “take on” certain employees. In such a situation, they remain employees of the Target and it is the Target’s responsibility to decide what to do with them after the acquisition. Employees part of the asset sale will be offered new employment with the Acquirer (a separate legal entity). If the employees accept this offer, their employment with the Target ends, and their fresh employment with the Acquirer begins, subject to any terms that may be agreed.
Understanding the distinction and handling it correctly is crucial to minimize the risk of unfair dismissal claims. As seen from this case, the Company took an erroneous view about the nature of its acquisition, and also appeared to be confused about whether a change of company name and shareholding resulted in it being a different entity (it did not). Parties involved in the sale of business (whether shares or assets) should not overlook the human resources and employment law aspects, given the potential legal risks involved. Employment issues, if any should be discussed and negotiated at the outset, so that each party understands their responsibilities relating to the workforce of the Target.
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This article was written by Donovan Cheah. Donovan has been named as a Recommended Lawyer for Labour and Employment by the Legal 500 Asia Pacific 2017, 2018, 2019, 2020 and 2021, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.
Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.
